Quick Answer: What Is The Purpose Of An Interest Rate?

So overall, the function of interest rates are to reward investors for the risks that they take, being either opportunity costs, or risks of loss on their investment.

From that point of vue, interest rates are a necessity because they help allocating the resources in an effective manner throughout the economy.

Why do we charge interest?

Interest rates are the price we pay to borrow money and in the big scheme of things, they are a welcome price because we need to have access to money. But if you are aware of how interest rates are derived, you can manage your own credit carefully to ensure that you don’t pay too much in interest charges.

Why real interest rate is important?

Inflation and saving rates

They needed to attract deposits. Therefore, real interest rates were better for savers than indicated by looking at base rates. In a liquidity trap, lower interest rates may be ineffective in boosting demand because there are many other factors at work.

Why is it important to understand the concept of interest?

Why interest rates are SO important. A modern economy is intrinsically linked to interest rates, thus their importance on the financial markets. Interest rates affect consumer spending. The higher the rate, the higher their loans will cost them, and the less they will be able to buy on credit.